Congressional Budget Office
Director's Blog

This morning, CBO released a new report, Technological Change and the Growth of Health Care Spending. I am testifying before the Senate Budget Committee on the new report and on our long-term health projections, which we released in November. (For video of the hearing, here.) The report on technological change was authored by Colin Baker of our Health and Human Resources Division.

My oral remarks for today’s hearing summarize the report as well as our long-term health outlook, and my notes for those remarks are below.

• The rising costs of health care represent the nation’s central long-term fiscal challenge, and this morning CBO is releasing a new study on the factors contributing to health care cost growth.
• Over the past four decades, health care spending has roughly tripled as a share of the economy – from about 5 percent of GDP in 1960 to more than 15 percent today.
• A common way of measuring the rate at which health care costs are rising is the growth in cost per beneficiary relative to income per capita. This concept is referred to as “excess cost growth” – which doesn’t necessarily mean excessive growth, just that health care costs are rising faster than income.
  • Excess cost growth has averaged slightly more than 2 percent per year over the past 30 years.
  • Note that the rate has been similar in Medicare, in Medicaid, and in the rest of the health system. That’s because many of the same forces that drive the growth of federal health care spending also affect private health care spending.
  • Also note that cost growth in the 1990s slowed relative to that of previous decades.
    • Some analysts attribute that lull to greater enrollment in managed care plans as well as to excess capacity among some types of providers, which increased health plans’ negotiating leverage.
    • Since the late 1990s, however, a combination of slower economic growth and accelerated spending on health care has led to a sharp increase in health care costs as a share of GDP-from 12.5 percent in 1999 to 14.5 percent in 2005.
• In explaining why health costs rose over the past several decades, most analysts agree that the most important factor has been the emergence, adoption, and widespread diffusion of new medical technologies and services.
  • Some advances permit the treatment of previously untreatable conditions, introducing new categories of spending. Others, relative to older modes of treatment, improve medical outcomes at added cost, boosting existing types of spending.
  • Available empirical estimates suggest that approximately half of all long-term growth in health care spending has been associated with technological advances. Those estimates are arrived at largely through the process of elimination – that is, trying to explain cost increases caused by all other variables.
  • One example is the aging of the population. Among adults, health care spending generally increases with age. However, the population aged only gradually over the past half century, and aging played only a minor role in the large increases in spending that occurred. Published analyses suggest that aging can account for only about 2 percent of all spending growth from 1940 to 1990, for example.
  • Other examples of factors contributing to spending growth include the growth in personal income and the rising share of health care costs paid by third-party insurers over recent decades; both of those trends contributed to spending growth by increasing demand for medical care. But again these factors, by themselves, explain only a modest part of the long-term rise in health care spending.
  • The rising price of medical goods and services relative to prices outside the health sector – itself perhaps reflecting differential productivity trends – has also played some role in causing relative real per capita costs to increase, although measurement of prices on a quality-adjusted basis can be difficult and in any case this factor seems to explain a fifth or less of the increases.
  • Other factors such as defensive medicine and physician-induced demand do not appear to explain a significant part of the growth in spending, at least according to published analyses.
  • Another factor that has recently raised concern involves the increased prevalence of obesity. The fraction of Americans who are overweight or obese has increased in recent years, and obesity raises an individual’s risk of serious illnesses such as cardiovascular disease and diabetes.
    • In 2001, spending for health care per person of normal weight was $2,783, compared with $3,737 per obese person and $4,725 per morbidly obese person.
    • If health care spending per capita remained at 1987 levels for each category of body weight but the prevalence of obesity changed to reflect the 2001 distribution, health care spending would have risen by only 1.4 percent per capita on average. Because actual spending per capita rose by 34.6 percent, this implies that the change in the prevalence of obesity could account for only about 4 percent of all spending growth from 1987 to 2001.
    • In other words, most of the increased spending on obese people occurred not because of greater obesity prevalence, but rather because spending increased on each obese person – which itself likely reflected changes in technology. In 1987, spending per morbidly obese person was about 18 percent higher than spending per person of normal weight, but by 2001 it was 70 percent higher.
  • Stepping back, the bottom line from all these analyses is that the single most important factor driving the long-term increase in health care costs involves medical technology.
    • Technological advances on average have brought major health improvements, but they often then get applied in settings where their benefits seem much less obvious.
• Turning to the future, in the absence of an unprecedented change in these long-term trends, national spending on health care will grow substantially.
  • CBO’s projections of health care spending assume that federal law affecting Medicare or Medicaid does not change. Those projections should thus be interpreted as providing a measure of the scope of the potential problem posed by rising costs rather than a prediction of future developments, because the magnitude of the problem will ultimately necessitate changes in the government’s programs.
  • Under CBO’s projections, health care spending will double by 2035, reaching 31 percent of GDP. Thereafter, health care costs will continue to account for a steadily growing share of GDP, reaching 41 percent by 2060 and 49 percent by the end of the 75-year projection period.
  • Net federal spending on Medicare and Medicaid now accounts for about 4 percent of GDP. That rises to 12 percent by 2050 and 19 percent by 2082.
  • Most of that increase is due to excess cost growth, not to an aging population.
• The rise in health care spending is the largest contributor to the growth projected for federal spending over the long term.
• All of these projections raise fundamental questions of economic sustainability. If outlays increased as projected and revenues did not grow at a corresponding rate, deficits would climb and federal debt would grow significantly.
  • The resultant economic damage could be averted by putting the nation on a sustainable fiscal course, which would require some combination of less spending and more revenues than the amounts now projected. Making such changes sooner rather than later would lessen the risk that an unsustainable fiscal path poses to the economy.
• So what can be done? Given that future health care spending is the single most important factor determining the nation’s long-term fiscal condition, the Congressional Budget Office is devoting increasing resources to assessing options for reducing such spending in the future.
  • Straightforward changes to the Medicare and Medicaid programs-such as more stringent eligibility criteria, greater cost sharing, or changes in provider payments-could reduce federal spending in part by shifting costs from the federal government to households. Ultimately, however, such cost-shifting approaches are unlikely to be sustainable, and controlling federal spending on health care while maintaining broad access to care under these programs will therefore almost certainly need to be associated with slower cost growth in the health care sector as a whole.
• Two potentially complementary approaches to reducing total health care spending-rather than simply reallocating spending among different sectors of the economy-involve generating more information about the relative effectiveness of medical treatments and changing the incentives for providers and consumers of health care. In addition to those changes, a variety of approaches to changing health-related behavior could improve health outcomes at a given level of costs.
• Costs appear to vary across the health sector for reasons that are not highly correlated with quality differences.
• Costly services that are known to be highly effective in some types of patients are sometimes provided to other patients for whom clinical benefits have not been rigorously demonstrated. More information on the “comparative effectiveness” of alternative medical treatments could offer a basis for ensuring that future technologies and existing costly services are used only in cases in which they confer clinical benefits that are superior to those of other, cheaper services.
  • To affect medical treatment and reduce health care spending, though, the results of comparative effectiveness analyses would ultimately have to change the behavior of doctors and patients-that is, to get them to use fewer services or less intensive and less expensive services than are currently projected. Bringing about those changes would probably require action by public and private insurers to incorporate the results into their coverage and payment policies in order to affect the incentives facing doctors and patients.
  • For example, Medicare could tie its payments to providers to the cost of the most effective or most efficient treatment. If that payment was less than the cost of providing a more expensive service, then doctors and hospitals would probably elect not to provide it. Alternatively, enrollees could be required to pay for the additional costs of less effective procedures (although the impact on incentives for patients and their use of care would depend on whether and to what extent they had supplemental insurance coverage that paid some or all of Medicare’s cost-sharing requirements).
• Finally, the ultimate objective of any health care system is to promote health, whether by treating diseases that arise or by preventing them from occurring in the first place. In that context, proposals that encourage more prevention and healthy living can help promote better health outcomes, although their net effects on federal and total health spending are uncertain. Nonetheless, reform proposals could encompass preventive measures and efforts to encourage healthier lifestyles.

Yesterday I gave a talk on health care cost containment at a forum sponsored by the Alliance for Health Reform, and spoke specifically about issues in the design of Medicare and Medicaid demonstrations and waivers. Some have misinterpreted my comments as a criticism of the level of cooperation between the Centers for Medicare and Medicaid Services (CMS) and the Congressional Budget Office. Nothing could be further from the truth: we enjoy and benefit from a great working relationship with CMS. The CMS staff has a difficult and challenging job, and we respect them highly.

The issue is that too few of the demonstration projects and waivers are designed to produce the kind of analytical information that will help policy-makers grapple with options for constraining growing health care costs. Many factors, including statutory requirements and use of such authorities for broader purposes, have often meant that these projects have not been as useful as they could be.

Especially since rising health care costs are the key factor determining the nation’s long-term fiscal future, we need a robust agenda of well-designed, rigorous demonstrations to develop the analytical base for achieving program savings without compromising quality. Knowledge gained from demonstrations may also have wider applicability in the health care system. We desperately need more knowledge about what works, and how approaches that hold promise can be implemented and improved. Major issues that cry out for further analytical development include, among others:

• how to integrate information on comparative effectiveness of competing interventions into Medicare and Medicaid payments,
• physician payment incentives,
• more integrated payment structures, such as those based on episodes of care or bundling across providers,
• root causes of and approaches to variation in utilization and costs across the country,
• more efficient payment methods, including competitive bidding,
• innovative approaches to coordinating care in specific populations, including those with chronic illnesses and high cost beneficiaries,
• the health and cost effects of prescription drugs, and
• how best to influence health behavior (on topics include diet and exercise)

We also need to be sure that the lessons from Medicare and Medicaid demonstrations and waivers are widely disseminated and understood.

Policy makers may wish to consider some sort of more formal process for setting research agendas and priorities in our public programs to provide more reliable and useful information about what works and what doesn’t.

CBO released its budget and economic outlook this morning, and the House Budget Committee held a hearing on the topic. I am pasting below the notes for my oral remarks at that hearing. (For video of the hearing, click webcast.)

The outlook report is put together by a large team of analysts and editors at CBO. It is deeply impressive to see how well the team works together in producing a document of this complexity!

——————

NOTES FOR ORAL REMARKS

First, the economy has been buffeted by several inter-linked shocks, and the risk of recession is significantly elevated relative to normal economic conditions.

• After a dramatic runup in housing prices during the first half of this decade, housing prices have started to decline and many forecasters expect further drops this year.
• The weakening of the housing sector directly affects the economy through a reduction in residential investment, and indirectly affects the economy through reduced consumer spending as a result of lower housing wealth
• Problems in the mortgage markets have spilled over into broader turmoil in financial markets, which poses the risk of impeding the flow of credit essential to a modern economy
• Energy prices have also increased substantially. Although the effect of increases in the price of oil on the macroeconomy is smaller than in the 1970s and 1980s, the rise in oil prices is still a drag on the economy
• The combination of these forces has not yet fully manifested themselves, although the unemployment rate has ticked up. Indeed, the three-month moving average unemployment has now risen by 0.4 percentage points relative to the same period last year, which has only and always occurred in conjunction with a recession over the past three decades.
• On the other hand, other measures that typically have accompanied that large an increase in the unemployment rate at the onset of a recession – such as a steep rise in unemployment insurance claims – have not as yet occurred. Indeed, initial UI claims have recently ticked down just a bit.
• Especially with the most recent and notable action by the Federal Reserve yesterday, many professional forecasters are projecting continued — albeit sluggish — economic growth in 2008, rather than an outright recession.
• One bright spot to date, reinforcing the view of continued but slow growth rather than recession, has been net exports. Thus far, the depreciation of the dollar that is a necessary component of correcting our nation’s external imbalance has been gradual. And that has helped to stabilize and then even slightly improve the current account deficit, as net export growth has improved with the depreciation of the currency and continued growth abroad.
• The bottom line that the risk of recession is substantially elevated, but CBO expects, along with most professional forecasters, a period of unusually weak growth rather than outright recession.
• In particular, CBO expects growth for the year as a whole of under 2 percent and an increase in the unemployment rate to an average of 5.1 percent.
• A reflection of this slowing economic activity is that job growth fell by half between 2005, when it averaged 220,000 per month, and 2007, when it averaged 110,000. We expect it to fall in half again – to 55,000 per month – during the first half of 2008.

Let me now turn to the budget outlook.

• We have already seen some slowing of revenue growth, especially in corporate income taxes, and CBO expects further slowing this year.
• Our baseline suggests that among other factors, the slowing economy will boost the deficit to $219 billion, or 1.5 percent of GDP, this year.
• If Congress provides the additional funding for operations in Iraq and Afghanistan requested by the Administration, the deficit would rise to $250 billion. And if a fiscal stimulus package is enacted, the 2008 deficit could be substantially higher – and at least from a ST stimulus perspective, that could be desirable.
• Thereafter, under the baseline, the budget moves toward balance in 2012. However, as many people have noted, that baseline excludes various policy changes that are widely viewed as likely to occur.
• For example, the baseline assumes no further AMT relief, and so the AMT substantially expands its reach.
• If one instead continued AMT relief, extended the 2001 and 2003 tax legislation past the scheduled 2010 expiration, adopted an alternative scenario for the future global war on terrorism, and increased the rest of discretionary spending in line with GDP, the outcome is substantially different than the baseline. Instead of a small cumulative surplus between 2009 and 2018, the result would be a deficit of about 3.5 percent of GDP.

Even over the next 10 years, the nation’s longer-term budget pressures begin to manifest themselves.

• Caseloads on both Medicare and Social Security are projected to rise. SS beneficiaries rise from 50 million in 2008 to 64 million in 2018. Projected increases in caseloads account for about 30 percent of the growth in mandatory spending between 2008 and 2018.
• More fundamentally, the cost per beneficiary in Medicare is projected to continue rising significantly faster than income. As a result, Medicare and Medicaid spending rises from 4.6 percent of GDP to 5.9 percent; Social Security from 4.3 to 4.9.
• Thereafter, under the long-term budget outlook we released in December, health care costs increasingly dominate the federal budget.
• Under the alternative fiscal scenario embodied in our long-term budget outlook, the nation’s fiscal gap over the next 75 years amounts to 6.9 percent of GDP.
• Most of that is not due to an aging population

Given the ST economic environment and LT fiscal imbalance, let me end by briefly discussing a report that CBO wrote for this committee and the Senate Budget Committee on fiscal stimulus options.

• In particular, when the economy is particularly weak, the key constraint on short-term economic growth is demand for the goods and services that firms could produce with existing resources.
• In most circumstances, by contrast, and certainly over the long term, the key constraint on economic growth is the rate at which firms’ capacity to produce is expanded, through forces like increases in capital and labor and improvements in productivity.
• When the constraint on short-term growth is aggregate demand, as appears to be the case today, both monetary and fiscal policy can help by boosting spending.
• On the fiscal policy side, the automatic stabilizers built into the budget will help to attenuate any economic downturn by providing a cushion to after-tax income.
• The question is whether additional fiscal action is necessary. One way to think about it is that fiscal stimulus can help provide insurance against the risk and severity of a possible recession.
• Our estimates suggest that stimulus of between ½ and 1 percent of GDP or so would reduce the elevated risk of recession to more normal levels, as long as the stimulus is well-designed.
• The stimulus need not be targeted at what caused the economic weakness. Instead, the key is that it bolsters aggregate demand and thereby helps to jump start a positive cycle of increased demand leading to increased production, until the constraint once again becomes how much we can produce rather than how much we are willing to spend.
• So what would work? A well-designed fiscal stimulus would have several central principles:

• First, it would be delivered rapidly. A problem with some efforts at fiscal stimulus in the past is that they took too long to take effect — in a matter of months, not years. If the purpose of fiscal stimulus is to reduce the risk and severity of a recession, it would need to take effect quickly. Stimulus delayed is stimulus denied, and could even prove unnecessary and potentially counterproductive if delayed so long that it takes effect after the period of economic weakness has passed.
• Second, it would be temporary. As just mentioned, the nation faces a severe long-term fiscal gap. Stimulus that exacerbates that long-term budget imbalance could impose greater economic costs than benefits.
• Finally, it would be cost-effective, in the sense of boosting aggregate demand as much as possible at a given budgetary cost.

The Senate Finance Committee held a hearing this morning on economic stimulus and the report on the topic that CBO issued last week at the request of the House and Senate Budget Committees. (For video of the hearing, click here. )

The notes I used for my oral remarks at the hearing are posted below.

1. The risk of recession is significantly elevated relative to normal economic conditions.
   1. This morning, the Federal Reserve took aggressive action to address what it called “appreciable downside risks to growth.”
   2. Especially in light of this most recent Federal Reserve action, many professional forecasters suggest continued — albeit sluggish — economic growth in 2008, rather than an outright recession.
   3. In any case, several quarters of unusually weak growth are likely. This type of situation is relatively rare, and the types of policies appropriate to address it are not necessarily appropriate to more normal economic conditions.
2. In particular, when the economy is particularly weak, the key constraint on short-term economic growth is demand for the goods and services that firms could produce with existing resources.
   1. In most circumstances, by contrast, and certainly over the long term, the key constraint on economic growth is the rate at which firms’ capacity to produce is expanded, through forces like increases in capital and labor and improvements in productivity.
   2. When the constraint on short-term growth is aggregate demand, as appears to be the case today, both monetary and fiscal policy can help by boosting spending.
      1. On the fiscal policy side, the automatic stabilizers built into the budget will help to attenuate any economic downturn by providing a cushion to after-tax income.
      2. The question is whether additional fiscal action would be beneficial as a complement to monetary policy actions and the automatic stabilizers built into the budget. One way to think about it is that fiscal stimulus can help provide insurance against the risk and severity of a possible recession.
      3. Our estimates suggest that stimulus of between ½ and 1 percent of GDP or so would reduce the elevated risk of recession to more normal levels, as long as the stimulus is well-designed.
   3. The stimulus need not be targeted at what caused the economic weakness. Instead, the key is that it bolsters aggregate demand and thereby helps to jump start a positive cycle of increased demand leading to increased production, until the constraint once again becomes how much we can produce rather than how much we are willing to spend.
3. Principles for effective stimulus.
   1. So what would work? A well-designed fiscal stimulus would have several central principles:
      1. First, it would be delivered rapidly. A problem with some efforts at fiscal stimulus in the past is that they took too long to take effect — in a matter of months, not years. If the purpose of fiscal stimulus is to reduce the risk and severity of a recession, it would need to take effect quickly. Stimulus delayed is stimulus denied, and could even prove unnecessary and potentially counterproductive if delayed so long that it takes effect after the period of economic weakness has passed.
      2. Second, it would be temporary. As CBO highlighted in our long-term budget outlook released last month, the nation faces a severe long-term fiscal gap. Stimulus that exacerbates that long-term budget imbalance could impose greater economic costs than benefits.
      3. Finally, it would be cost-effective, in the sense of boosting aggregate demand as much as possible at a given budgetary cost.
4. Tax and spending.
   1. With those principles in mind, we can briefly examine some of the leading proposals under discussion on both the tax and spending sides of the budget.
   2. First the tax side:
      1. For individuals, the key is to get money quickly to people who will spend most of it.
         1. On that note, the experience with the 2001 tax rebates was more auspicious than studies of earlier rebates would have suggested. Roughly 1/3 of the rebates were spent in first 3 months, 2/3 by second 3 months.
         2. To boost cost-effectiveness further, policymakers would need to focus on lower-income households and those with difficulty borrowing. The studies of the 2001 tax rebate suggest that such lower-income and credit-constrained recipients increased their spending substantially more than the typical recipient.
         3. The low-income and credit-constrained households most likely to spend money quickly, however, typically don’t owe income tax liability. According to the Joint Committee on Taxation, of the 154 million tax units in the United States, about 66 million do not owe income tax liability – and about half of those, or 30 million, have wage income and file an income tax return.
         4. Regardless of whether such households are included, a major administrative issue with rebates involves when the checks could go out given that the IRS is busy with tax filing season. It will be a major challenge to issue checks before May or June at the very earliest. The JCT explores this and other crucial administrative questions in a document prepared for today’s hearing.
      2. Businesses:
         1. On the business side, economic theory suggests that temporary investment incentives can create an incentive for firms to shift investment into the short run, which is helpful as stimulus.
         2. The experience from bonus depreciation provisions enacted during 2002 and 2003, however, was somewhat disappointing. So this approach holds promise but the most recent results suggest some caution in our expectations about their effectiveness.
   3. Finally, on the spending side, we can divide spending into three categories.
      1. First, activities like infrastructure:
         1. Any dollar actually spent on these activities is effective as ST stimulus.
         2. But a major challenge is getting dollars out the door in a timely fashion. Although some individual projects may be able to accelerate payouts, in general, this approach ranks low from a cost-effectiveness perspective because of the low spendout rates in the first year.
      2. A second category of federal spending involves assistance to state and local governments, as was provided in 2003.
         1. The effectiveness of this approach depends on what states do – it is effective to the extent that it obviates spending cuts or tax increases at the state level.
         2. And that in turn may depend on how much of the money goes to states experiencing fiscal difficulty. Better bang for the buck the larger the share going to hardest hit states.
      3. Final category involves transfer payments like UI and food stamps.
         1. These payments should be evaluated much like individual tax rebates, and they rank relatively high on cost-effectiveness because they tend to get money to people who will spend most of it quickly.
         2. They may also be attractive administratively, because it is possible that the money could get out the door faster than on the tax rebate side.
         3. On the other hand, some of these proposals underscore the tension between what’s best in the short-term and what’s best in the long-term. During periods of economic strength, for example, expanding UI benefits or duration has been shown to increase unemployment levels somewhat. Such expansions may thus be effective stimulus in the short term, but if perpetuated over the long term, may raise economic efficiency concerns.

CBO released a report today, written at the request of the House and Senate Budget Committees, on the current economic situation and options for fiscal stimulus to boost short-term aggregate demand. CBO will release more information about economic and budget conditions in its Budget and Economic Outlook on January 23.

The report’s key points are that:

• Strong indications suggest that economic growth is slowing and will remain sluggish for much of this year. Most professional forecasters are continuing to project very slow growth, as opposed to an outright recession, this year. The risk of recession is elevated, however, and some respected economists believe that the probability of a recession has now risen to 50 percent or greater.

• Fiscal policy stimulus may not be necessary to avoid an outright recession, if most current forecasts are correct. Nonetheless, policymakers may choose to proceed with a stimulus package to bolster a weak economy and as insurance against the elevated risk of a recession. Some economists advocating a stimulus also believe that a recession, if it occurs, could prove to be unexpectedly deep; a fiscal stimulus would help to reduce the severity of a recession should one occur.

• Fiscal stimulus aims to boost economic activity during periods of economic weakness by increasing short-term aggregate demand. This approach is in contrast to policies aimed designed to improve long-term economic growth: such policies work by increasing the economy’s capacity to produce. Because short-term stimulus is focused on demand, its efficacy depends on a different set of principles than long-term supply-based policies, and it is often in tension with those principles. Some of the most effective forms of short-run stimulus provide little aid to, and may even retard, long-run economic growth if made permanent. At the same time, many options that promote long-term growth provide little short-term stimulus.

• Effective stimulus does not necessarily require addressing the source of economic weakness directly; instead, it requires strengthening aggregate demand.Although much of the current economic weakness can be traced to the housing and mortgage markets, other factors, such as the high price of oil, have played an important role. If policymakers choose to address problems in the housing and mortgage markets, possible actions should therefore be evaluated primarily with regard to their effectiveness in correcting identifiable failures in those markets—and not necessarily with regard to their value in counteracting economic weakness. Such policies may nonetheless help to reduce the severity of a possible recession.

• The most effective types of short-term fiscal stimulus (delivered either through tax cuts or increased spending on transfer payments) are those that direct money to people who are most likely to quickly spend the bulk of any additional funds provided to them. The report includes a summary table assessing various types of tax and spending options from the perspective of short-term fiscal stimulus effects.

The report was written by a team of analysts primarily from our Macroeconomic Analysis and Tax Analysis Divisions.

CBO released a study today on consumers’ responses to the substantial upward trend in gasoline prices that began in 2003.

Many drivers have responded to higher gasoline prices in the way that they drive, but overall the response has been very small.

• Freeway-driving motorists have adjusted to higher prices by making somewhat fewer trips and by driving somewhat more slowly.
  • CBO used data collected at a dozen metropolitan highway locations in California, along with data on gasoline prices in California, to identify changes in driving patterns: On weekdays in the study period, for every 50 cent increase in the price of gasoline, the number of freeway trips declined by about 0.7 percent in areas where rail transit is a nearby substitute for driving; transit ridership on the corresponding systems increased by a commensurate amount; and on weekends median speeds on uncongested freeways declined by about 0.75 miles per hour.

• After increasing steadily for more than 20 years, the market share of light trucks (including SUVs and minivans), relative to all new passenger vehicles, began to decline in 2004. As a result, the average fuel economy of new vehicles has increased by more than half a mile per gallon since 2004 (because light trucks tend to be less fuel efficient than cars). Stricter fuel economy standards for light trucks have also contributed to that increase

• Used-vehicle prices have shifted, reflecting changing demand, particularly with respect to fuel economy: The average prices for larger, less-fuel-efficient models have declined over the past five years as average prices for the most fuel efficient automobiles have risen.

• Total U.S. sales of midgrade and premium gasoline have declined gradually since 2000, even as consumption of the less expensive regular formulations has increased. Although consumption of the different grades of gasoline depends strongly on what kinds of vehicles consumers drive (and on manufacturers’ fuel octane recommendations for those vehicles), it also might have been influenced by the general increase in gasoline prices since 2003.

The study notes that the response of consumers to higher gasoline prices has important implications for policies that affect gasoline consumption, including CAFE (Corporate Average Fuel Economy) standards for cars and light trucks. Because higher gasoline prices increase the demand for vehicles with better fuel economy ratings, they reduce the economic costs (and fuel savings) of adopting more-stringent CAFE standards. At the same time, to the extent stricter CAFE standards improve fuel efficiency beyond what consumers would choose in the absence of such standards, they reduce the per-mile costs of driving — which would partially reverse some of the effects of higher gasoline prices discussed in this study. The federal tax on gasoline, by contrast, reinforces rather than neutralizes the behavioral and vehicle choice effects of higher gasoline prices. It also immediately affects all motorists’ incentives to reduce gasoline consumption, whereas CAFE standards primarily affect motorists only after they replace the vehicles they were driving at the time the standards were implemented.

David Austin, an economist in CBO’s Microeconomic Studies Division, wrote the report. In addition to his work on gas prices and CAFE, David has done research in the areas of liability policy and toxic emissions; Clean Air Act regulations; consumer benefits of new technologies; and allocation of emissions controls, and research and development in the pharmaceutical industry. He has been at CBO for six years; prior to that was at Resources for the Future for eight years. He received his undergraduate degree from Stanford University and his economics Ph.D. from UC Berkeley. He also has a master’s degree in statistics from Yale University. And he has an impressive track-and-field record, including a mile best of 4:19.

Substantial interest has arisen recently regarding how much household income and workers’ earnings bounce around from year to year, prompted in part by the work of Jacob Hacker at Yale University. This topic is important not only to understand potential sources of household anxiety, but also in designing social insurance systems and the tax code.

In previous work released in 2007, CBO examined the volatility of workers’ earnings. That report concluded that earnings were surprisingly volatile, but had been roughly as volatile since the early 1980s — in other words, earnings volatility had not increased.

In preliminary work that I discussed in the latter half of a talk hosted by the Society of Government Economists at the ASSA meetings in New Orleans over the weekend, CBO has now examined the volatility of household income (rather than workers’ earnings volatility, the subject of our study in 2007). The preliminary results suggest that household income is much less volatile than individual worker’s earnings, and that household income volatility has not increased over time — and perhaps even declined slightly. Some other recent studies relying on other data sources have suggested increases in household and family income volatility, but various problems in the surveys used in those studies may be contaminating those results. CBO will soon be releasing our final report on the topic.

CBO’s work on income and earnings volatility is led by Molly Dahl and Jonathan Schwabish of CBO (along with Thomas DeLeire of the University of Wisconsin-Madison) .

• Molly Dahl joined CBO in 2004 and is currently a Principal Analyst in the Health and Human Resources Division. Her work focuses on labor issues, especially those pertaining to low-income households. Her recent CBO publications include Changes in the Economic Resources of Low-Income Households with Children and Changes in Low-Wage Labor Markets Between 1979 and 2005. She is also an Adjunct Assistant Professor in the Economics Department at Georgetown University. She received her B.A. in mathematics and economics from the University of North Carolina – Chapel Hill (she is a life-long fan of their men’s basketball team) and her Ph.D. in economics from the University of Wisconsin – Madison.

• Jonathan Schwabish joined the CBO in 2004 and is a Principal Analyst in the Long-Term Modeling Group. He recently authored an article on measurement error for the Journal of Economic and Social Measurement and has a paper forthcoming in the journal Public Finance Review about the relationship between inequality and state public spending. His publications include articles in Contemporary Economic Policy, The Monthly Labor Review, Public Finance Review and the award-winning book, Human Capital in the United States from 1975 to 2000: Patterns of Growth and Utilization, published by the W.E. Upjohn Institute. Most of Jonathan’s work deals with CBO’s long-term Social Security and Medicare model (CBOLT) where he is mainly engaged in projecting earnings and labor force behavior. A co-authored CBO paper issued last year described those processes in detail. Prior to joining CBO, Jonathan worked on a variety of state and local governance and economic issues at a nonprofit in New York City. He also currently teaches graduate statistics at the Georgetown Public Policy Institute. A fan of the 26-time World Champion New York Yankees and the New York Giants, Jonathan received his undergraduate degree at the University of Wisconsin at Madison and holds a master’s degree in economics from The Johns Hopkins University, and master’s and Ph.D. degrees in economics from the Maxwell School at Syracuse University.

CBO today released the January monthly budget review.  In the first quarter of fiscal year 2008 (the first quarter of the 2008 fiscal year covers October through December 2007), the budget deficit was $107 billion — about $27 billion more than in the same quarter last year.  On January 23, CBO will release its Budget and Economic Outlook, which will provide updated estimates of the budget for fiscal year 2008 along with the next ten fiscal years.

After a brief break from blogging during the holidays, I will begin regular entries again today…

This morning, our first Robert Wood Johnson Health Policy Fellow joins CBO. The RWJ fellowship program is sponsored by the Institute of Medicine of the National Academies, and is extremely well-regarded in both health and policy circles. As part of our ongoing effort to augment our already exceptional internal resources on health care policy, we’re excited about hosting an RWJ fellow.

Our RWJ fellow this year is Dr. Renee Fox. Dr. Fox is Associate Professor in the Department of Pediatrics of the University of Maryland’s School of Medicine in Baltimore.  While at CBO, she will help review the various health-related publications we issue, help inform our scoring process with a real-world view of how medicine is practiced, and co-author CBO reports.

Dr. Fox is a graduate of Cornell University College of Arts and Sciences and received her M.D. from the University of Rochester School of Medicine and Dentistry. She remained in Rochester to complete her pediatric residency at the University of Rochester, later joining the fellowship program at the Joint Program for Neonatology at the Harvard Medical School. In 1986 she joined the faculty at the University of Maryland. In 2004-2005 she was a fellow in the Hedwig van Ameringen Executive Leadership in Academic Medicine Program for Women at Drexel College of Medicine, an in-depth program focused on preparing senior women faculty to move into leadership positions in academic medicine. She is the Head of the Division of Neonatology, Consortium Chief of Hospital Based Programs, Director of Clinical Affairs for the Department of Pediatrics, Medical Director of the Neonatal Intensive Care Unit at the University of Maryland Medical Center, and Medical Co-Director of the Maryland Regional Neonatal Transport Program, a joint program of the University of Maryland Medical Center and the Johns Hopkins Children’s Center. Dr. Fox has served as chairman of the Perinatal Advisory Committee for the Maryland Institute for Emergency Medical Services System.